Economy Watch: Fed Likely to Keep Raising Rates, Reduce MBS Holdings

Though not definite, the Federal Open Market Committee's latest meeting notes hint that the Fed is sticking with its plans to make borrowing more expensive, while reducing the size of its $4.5 trillion balance sheet later this year.
Janet Yellen, Chair of the Board of Governors of the Federal Reserve System
Janet Yellen, Chair of the Board of Governors of the Federal Reserve System

Ahead of the official U.S. employment numbers at the end of the week, the Federal Open Market Committee released the notes from its March 14-15 meeting on Wednesday. Though not definitive, they strongly hinted at the Fed staying the course when it comes to making borrowing more expensive.

“Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue,” the notes said. The notes also posited that the Fed would probably start reducing the size of its balance sheet later this year, which is about $4.5 trillion. During the worst of the recession, one of the techniques the Fed turned to was economic stimulation through buying assets, especially Treasuries and mortgage-backed securities.

Since then, the central bank has been reinvesting the proceeds from those assets. “When the time comes to implement a change to reinvestment policy, participants generally preferred to phase out or cease reinvestments of both Treasury securities and agency MBS,” the notes said.

However, any policy change will not be radical or sudden, lest it inspire panicked or otherwise worried behavior among investors: “An approach that phased out reinvestments was seen as reducing the risks of triggering financial market volatility or of potentially sending misleading signals about the committee’s policy intentions. … Many participants emphasized that reducing the size of the balance sheet should be conducted in a passive and predictable manner.”